Retail Growth

Ecommerce Fulfillment Models: How to Choose the Best One for Your Business

Aaron Sullivan
September 20, 2022

Your ecommerce fulfillment model has a direct impact on your customers’ experience. But you only have so much control over the fulfillment process itself. 

In a 2022 Mitto survey, 55% of US shoppers say they’ve canceled a delayed shipment due to a bad post-purchase customer experience.

The good news is that 91% of them would be more understanding if their experience was well-managed.

When you determine which fulfillment model is best for your business, you’re really determining how much risk you can live with as an online store owner. 

In-house fulfillment gives you more control over how your product is packaged, for example, but wouldn’t comfortably sustain a sudden surge in orders. Third-party fulfillment is scalable, but you have less control over the fulfillment partner’s treatment of your brand. 

That’s what makes your choice of models an important one — you need to control what you can and determine which factors have the highest impact on your customers. 

So while it may be tempting to choose “whatever’s least expensive,” a model that lowers your fulfillment costs won’t matter if you hemorrhage customers because they don’t get timely shipping updates.

Unless your chosen ecommerce fulfillment model balances efficiency with customer satisfaction, you risk alienating customers who may otherwise have stuck with you.

What are ecommerce fulfillment models?

Ecommerce fulfillment models are sets of processes designed to move a product purchased online from business to buyer.

At its core, the ecommerce order fulfillment process has the same steps:

  • Ecommerce store creates a product inventory
  • Store retrieves products when customer orders
  • Store packages products and places shipping label on package
  • Logistics partner (USPS, UPS, FedEx) delivers package to customer

But here’s where it gets interesting. Some ecommerce companies want to handle the entire process themselves to maintain a specific customer experience. Others prefer outsourcing fulfillment altogether. Ecommerce fulfillment models take shape around these preferences.

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3 ecommerce fulfillment models to consider

If you run an online retail store, you can’t escape choosing an ecommerce fulfillment model. Each has benefits and challenges, so take stock of your business needs and goals first.

1. In-house fulfillment

You’ve adopted in-house fulfillment when you manage the shipping process from beginning to end, including product storage, picking, and packaging. It’s a popular model for ecommerce startups who want to own the post-purchase customer experience or who can’t handle the costs of a fulfillment partner.

Business benefits

Relatively easy to launch. If you have extra space in your office, you can start fulfilling in-house. You’ll need the space for inventory storage, packing materials (tape, tissue), a label printer, and shipping boxes. 

Control over most of the ecommerce fulfillment process. When you launch a brand, it’s natural to want to leave nothing to chance. While you can’t control the delivery driver’s behavior, you can control customer experiences as small as the arrangement of items in a box.

Even if you’re a medium-sized ecommerce business with rented warehouse space and an employee to manage it, that’s still a level of control you don’t have with an external fulfillment provider.

Business challenges

Time-consuming. The “hands-on” nature of in-house fulfillment can take you away from important marketing activities needed to grow the business, such as customer acquisition. 

Difficult to scale. Say you have a partner who helps with customer acquisition. As the number of orders rises, you may need to find additional storage space, negotiate bulk pricing on packaging, and field more customer support requests.

If this extra work starts causing shipping delays or lapses in customer communication, you’ll need to consider outsourcing in order to scale the business smoothly.

Customer benefits

With in-house fulfillment, you have the flexibility to handle each shipment personally. 

Say you want to add a handwritten thank-you note to the box of a customer who’s shopped with you for more than a year. That small but meaningful post-purchase gesture has the potential to keep the customer shopping with you for much longer. 

2. 3PL provider (third-party logistics)

If you want to outsource all fulfillment-related tasks, consult a 3PL provider. A 3PL has its own warehousing and fulfillment facilities, as well as the staffing and technology to handle shipping and returns efficiently. The most sophisticated 3PLs can even replicate many elements of the customer experience once reserved for in-house fulfillment.

FedEx and UPS offer 3PL services, but they compete with dozens of niche 3PLs, such as the international company Passport Shipping that focuses on a modern experience for merchants.

Business benefits

Easy scaling. Consider a 3PL if your business is on a steady growth trajectory. Because 3PLs have fulfillment infrastructure in place, you no longer need to scramble to find additional storage or hire temporary employees to manage order volume spikes.

3PLs have already negotiated volume pricing with freight shippers, so as your business grows, you can be confident that you’re getting the best rates.

Brand-specific shipping strategies. Most 3PLs have the capacity to handle custom packaging and kitting requests for brand consistency. It’s up to you to design and source the boxes, inserts, and tissue, but the 3PL will handle the assembly.

Business challenges

Time-consuming to vet 3PL providers. Since fulfillment is such an important part of the post-purchase customer experience, choose your 3PL wisely. This process can take time. 

3PLs vary in size and reputation. Smaller 3PLs may offer your business more personalized service but fewer warehousing options, making it more difficult to scale. Larger 3PLs will have the most sophisticated order tracking systems and better volume pricing, but make sure their customer support is prompt and efficient.

Little personal control over day-to-day shipping operations. 3PL customer support is crucial since you have little to no oversight of their day-to-day operations. If you see an uptick in customers complaining about broken products or late shipments, your reputation depends on fixing these issues as rapidly as possible. 

Customers rarely blame 3PLs for shipping mishaps. They blame you.

Customer benefits

Because of the scaling that 3PLs offer to more established ecommerce businesses, customers won’t be exposed to as much pricing volatility as the other fulfillment models.

Say you run a smaller ecommerce company that self-fulfills. If you suddenly need to rent additional storage space, you may have to raise prices slightly to maintain margins. Some customers are sensitive to price increases, which might cause them to churn. A 2021 McKinsey study notes that the main reason for churn among subscription ecommerce businesses is a lack of value for price.

3. Dropshipping

Dropshipping is another third-party fulfillment solution that doesn’t require you to own or have inventory on-hand. Unlike 3PLs, you don’t own or pay to store inventory with a dropshipper, which often doubles as the manufacturer. 

Consider Sunrise Wholesale, a popular dropshipper serving the US and Canada. You simply market Sunrise’s products through an ecommerce storefront, establishing your own brand in the process. As the middleman, you pass orders to Sunrise, and they handle the rest.

Business benefits

Lower overhead costs. Imagine not having to worry about inventory management software, sourcing products, or finding a 3PL with enough warehouse space. The dropshipper absorbs these costs, leaving you more funds for marketing and customer acquisition.

No risk of overstock. Unsold inventory is a cost. It just sits on a shelf, and you pay a 3PL or storage facility for the privilege. With dropshipping, never worry about slashing prices on unsold products to clear inventory, potentially damaging your brand. 

Business challenges

Fewer customization options. Dropshippers often sell the same product to dozens of brands. In the interest of efficiency, they’ll use generic packaging when the product ships to your customer. If a dropshipper does allow some degree of customization, they’ll expect you to sell a certain quantity for it to make economic sense for them. 

With so little control, you can’t depend on fulfillment to be a significant brand-builder. 

Lower profit margins. Dropshipping helps lower startup costs, but it’s not always an easy way to boost profit margins. 

Say you sell a drill sourced by Sunrise. You pay Sunrise the wholesale price and decide whether to absorb the shipping costs or pass them on to the customer. The rest is profit. It might be tempting to sell at a lower retail price to compete in the crowded tool market, but razor-thin margins mean you have less to spend on building your brand.

To combat low margins, find a dropshipping product niche with less competition.

Customer benefits

Given the huge number of products dropshippers stock and ship, many partners won’t require your customers to return defective products for repair. Customers simply keep and dispose of a damaged product, saving them the hassle of returning it. Whenever you minimize these friction points, you improve the post-purchase customer experience.

Most dropshippers will credit your account for the defective product and quickly dispatch a replacement to your customer. Dropshipping platforms such as Zendrop will even let you customize a note of apology to the affected customer and include it in the package containing the replacement.

What do customers expect from an ecommerce fulfillment provider?

Your customers have little to no awareness of how the fulfillment process works behind the scenes, but they are keenly aware of the delivery experience. As you consider fulfillment models, you have to also weigh their impact on non-negotiable post-purchase customer expectations.

Quick access to shipping updates

Customers not only expect on-time delivery, they also want the ability to check on the progress of their shipments. Meeting this expectation hinges on the efficiency of your ecommerce fulfillment model and marketing automation platform.

Shopify’s 2022 Future of Commerce Trend Report finds that 45% of consumers said they want to see clearly anticipated delivery times at checkout. And if you can’t meet that anticipated delivery time, customers want to know ASAP.

One of the best ways to inform them is through email and SMS. Platforms such as Klaviyo offer integrations with the fulfillment software of many 3PLs, including ShipBob. Now you can send branded messages confirming delivery, announcing delays, and linking directly to your shipping provider. An additional integration with your ecommerce platform means you can include product information as well.

A sample shipping update from a Sephora order
Image source

Large 3PLs will have fulfillment locations spread around the country, which helps meet delivery expectations. It’s more likely that a customer in New York will get a shipment on time if the fulfillment center is in New Jersey.

If you dropship, delivery transparency at checkout is even more urgent. Many dropshipping suppliers are located in other countries, which impacts delivery time. 

To meet customer delivery expectations as a dropshipper, you may need to source the products first, store them, and ship them from locations closer to the end customer. If you rely solely on the dropshipper, you won’t enjoy the branded communications 3PLs can offer. You’ll have to rely on the updates of the shipping providers themselves (UPS, FedEx).

The same goes for in-house fulfillment. If you have a small, hands-on operation that uses customized packaging, it might take you an extra day to package an order before UPS or FedEx picks it up. Factor this workflow into your customer delivery messaging.

Easy (and free) returns processing

When a product breaks in transit or doesn’t fit, customers want a refund or replacement as quickly and cheaply as possible. While all models have the potential to make returns “easy” for the customer, you have the best shot at making them free with a 3PL.

The Future Shopper 2021 Report finds that free returns motivate 36% of online shoppers to buy from a particular brand. While good for customer acquisition, a smaller online business doesn’t have the order volume or profit margins to make free returns cost-effective. The next best thing is to make the returns process easy for the customer. 

If you’re a small self-fulfiller, you may have to pay for the return shipping cost and find a place to store unwanted items until you return them to inventory. Then there’s the additional expense of repairing damaged items unless the manufacturer replaces them.

Dropshippers may be in a similar situation since you’ll want to route the return through your business first to protect your brand. You may also have to complete the additional step of requesting a refund from your supplier.

A 3PL often offers lower shipping rates due to volume, so it might be easier to absorb the shipping costs of returns. But many 3PLs charge a fee to process returns, which you need to consider when you choose a fulfillment model.

Peace of mind

Peace of mind is an often unspoken reason behind your choice of an ecommerce fulfillment model. While both you and your customers expect products to arrive on time and intact, the reality is that shipping accidents and thefts happen frequently.

The 2022 Package Theft Annual Report shows 49 million Americans were victims of package theft over the past 12 months, with the average losses totaling more than $2.4 billion in stolen goods.

No fulfillment option can fully safeguard against accidents and thefts. But modern shipping protection plans can protect your brand and your bottom line when they happen — and give customers peace of mind.

Plan providers like Extend integrate with your ecommerce shopping cart, not your fulfillment software. It doesn’t matter whether you self-fulfill, dropship, or use a 3PL.

Extend Shipping Protection in cart offer
Image source

When a customer purchases a plan, you get a slice of the revenue to help offset the cost of replacing the item. The customer can file a claim and get an answer in real time.

Because it makes claims so simple, shipping protection is an essential piece of your fulfillment strategy.

The right ecommerce fulfillment model can boost customer loyalty

Think of ecommerce fulfillment as a type of customer support. Getting your product to the buyer quickly and safely is the problem your customers expect you to solve. Your chosen fulfillment model is the solution. If you meet this post-purchase customer expectation, then you give them a good reason to buy from you again.

Get a demo

To learn more about how Extend can improve your ecommerce fulfillment model with shipping protection plans, click here for a demo.

Aaron Sullivan
Aaron Sullivan is senior content marketing manager at Extend. He specializes in writing about e-commerce, finance, entertainment, and beer.

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